Kenya's economic policy with respect to the world coffee market

Export earnings from coffee accounted for 22 to 55 per cent of total export earnings for the period 1964-1977 in Kenya. Hence coffee prices determine Kenya's terms of trade and available domestic resources to a very large extent. In 1977, domestic income increased as much as 13.5 per cent due to the coffee price boom. Coffee prices are not only an important determinant of domestic income changes, but also of the balance of payments. It is estimated that one per cent change in coffee prices will induce a devaluation effect which is equal to a 0.7 per cent change in the exchange rate. These figures indicate the crucial importance of the world coffee market for the Kenyan economy and show Kenya's interest in accurate predictions of world coffee prices. It is pointed out, however, that reliable forecasts are not at hand, as market conditions are not only influenced by economic factors but also by weather conditions and the storage policy of the main coffee exporters and importers. International agreements may be seen as a device to stabilise the volatile world coffee market. Even if it is assumed that Kenya is a low-cost producer, the present international coffee quota system is favourable from Kenya's point of view. However, Kenya's situation could be improved still further if international tradable certificates for quotas were to be introduced. An international buffer stock for coffee, which has been under discussion since the middle of 1977, is generally favourable to Kenya. However, much depends on the level of national contributions to the funds. A proposal for calculating the magnitude of national contributions is worked out in this paper. It is questionable whether an international buffer stock for coffee will come into operation in the near future, but the Stabex system will be very favourable for Kenya in the short run. Kenya's past coffee market policy did not promote the country's growth, income distribution, and monetary stability or employment objectives as fully as possible. Future coffee market policy would be much more efficient if a variable export tax were introduced to compensate for the difference between the world market price and the domestic price. The domestic price would be set at a level just to guarantee the fulfilment of the national quota.